Real estate has its share of confusing terms that give people outside of the industry real fits. Take ‘trust deed’ and a ‘deed held in trust’. Despite sounding remarkably similar, the two terms mean drastically different things. They typify two types of arrangements that are not even on the same playing field.
A simple explanation is this: a trust deed is a financial arrangement that acts as an alternative to a mortgage while a deed held in trust is a management arrangement between two parties. Once you know the details, the two arrangements aren’t hard to understand. But without an explanation, ambiguity and confusion reigned.
Basics of the Trust Deed
A trust deed represents a financial arrangement between a property buyer and seller. It is frequently used to complete commercial real estate transactions where no mortgage is involved. But how is that possible? Hard money is one option.
Actium Partners, a Salt Lake City hard money lender that focuses on commercial real estate, says that a hard money loan is not a mortgage. It is a private loan governed by terms and conditions customized for the borrower. It is not unusual for hard money acquisitions to be arranged as trust deeds.
How It Works
Under a trust deed scenario, the buyer and seller work out a deal. At closing, the deed to the property is assigned to a third-party trustee. This is usually a title company. Although the buyer maintains practical control and legal ownership of the newly acquired property, the deed to that property is held in the name of the trustee. It is not fully transferred to the buyer until the loan used to acquire the property is satisfied.
Arranging commercial property transactions under a trust deed gives lenders access to a less complicated foreclosure process should it become necessary. That’s why trust deeds are preferred for commercial transactions.
Basics of a Deed Held in Trust
A deed held in trust is a management arrangement that gives legal title to a property to a third-party trustee who must then manage the property for the benefit of another party. The perfect example would be parents who transfer an investment property to a minor child through a deed held in trust.
The title to the property would be transferred to the trust administrator. That administrator would then manage the property on a day-to-day basis. Any and all benefits realized from that management would be forwarded to the child in some way, shape, or form.
Let us say the property generates rental income. Any income remaining after expenses are covered would also be held in trust until the child becomes a legal adult. At that point, the trust arrangement could be terminated, and the child given full ownership and access to the property and accumulated funds.
Two Types of Arrangements
It is important to note that deeds held in trust can be structured as one of two types of arrangements: a revocable trust and irrevocable trust. The former is a trust that can be modified, rescinded, etc. by the original grantor at some point in the future. The previously offered example would have been structured as a revocable trust.
An irrevocable trust is set in stone. It cannot be modified or rescinded at any time. Irrevocable trusts are preferred when a grantor wants a property’s benefits to continue in perpetuity or wants to shield the property from creditors.
Now you know the difference between a trust deed and a deed held in trust. The terms may sound similar, but they are completely unrelated and distinctly different.
